How to Take an IRA Loan Even When IRS Won’t Allow It

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Unlike 401(k) accounts which are permitted to offer participant loans, the IRS does not permit IRA loans. However, with a little creativity, this article shows you how to use your retirement account as a source of loan funds. Note that the following tactic is not a recommendation but simply a solution for people who get caught short of funds during this difficult economy.

The IRS has a 60-day rule for Individual Retirement Arrangements whereby you can distribute money from your IRA and replace it within 60 days for a nontaxable event. In effect, an allowance for a 60-day IRA loan (although not the intention of the rule). Let’s see how we can use this 60-day IRA distribution rule to provide yourself a year-round IRA loan.

Let’s hypothetically say you have $180,000 in your Individual Retirement Arrangement. You can take this single IRA and divide it into six equal accounts of $30,000 each. Let’s call these accounts #1 through #6. You can withdraw $30,000 from account #1. In 60 days, withdraw $30,000 from account #2 and ‘pay back’ the money to account #1. Sixty days later you withdraw $30,000 from account #3 and payback account #2, and so on. At no time, do you hold money out of any single account more than 60 days. In this manner, you are able to stretch the rule for 60 days over 360 days i.e. six IRAs x 60 days each to give yourself an IRA loan throughout the year.

Note that if you get through the 360 days and still need the $30,000, you have a problem because you cannot go back to IRA#1 for another 6 days since the rule is that you can only use this withdrawal feature once per year from any account. Since you used this IRA withdrawal feature 360 days ago with account #1, you must wait another 6 days for a full year to elapse. The alternative is to divide the IRA into 7 portions ($180,000/7 = $25,714). You can then keep the $25,714 as a loan indefinitely because 7 x 60 = 420 days, meaning you never need to employ the 60-day rule more than once per year with any single account.

Just be careful not to hold onto any IRA funds for more than 60 days or make an IRA withdrawal from any single IRA more than once per calendar year. Either violation will trigger the tax on that IRA. In addition, if under age 59 1/2 and no other exemption applies, you also will have a 10% penalty.

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14 comments - What do you think?
Posted by bobrichards -
June 23, 2011 at 11:29 pm

14 Responses to “How to Take an IRA Loan Even When IRS Won’t Allow It”

Since you used this IRA withdrawal feature 360 days ago with account #1, you must wait another 6 days for a full year to elapse. The alternative is to divide the IRA into 7 portions ($180,000/7 = $25,714). You can then keep the $25,714 as a loan indefinitely because 7 x 60 = 420 days, meaning you never need to employ the 60-day rule more than once per year with any single account.

Don’t cheat yourself. The workaround noted in this article is simply to borrow from yourself, but you could still have the money in the IRA fully invested, thereby deferring taxes. In short, in this case, taxes or investment is not the real issue; but it would have been better to borrow from yourself (and you won’t charge yourself interests, even though you’re forfeiting the opportunity costs to have the investment income from the IRA), than to pay high interest rate using other funding sources like credit cards.

I was checking out Swiss annuities when I was thinking about cleaning up my retirement portfolio and doing an IRA rollover. Swiss annuities seem pretty safe from the IRS. Their site is Gonthier Group. Does anyone know about Swiss annuities? Please, give me some more advice.

[…] In an earlier post, I explained how one could take a continuous, tax-free, penalty-free loan from their IRAs. Since you can remove money from an IRA and use the funds for 60 days per year, if you had 6 IRAs, then you could have a year-round tax-free, penalty-free loan to yourself (6 x 60=360 days). […]